Challenges and opportunities for Slovakia - the OECD view

It is a great pleasure to participate in this Roundtable to exchange ideas and perspectives on Slovakia’s main policy challenges and opportunities.

Slovakia has achieved an impressive transformation in just a few decades: managing the transition process to an independent country efficiently and peacefully; implementing growth-friendly reforms and opening the country to foreign investment; entering the Euro; and developing a strong financial system. These achievements did not prevent its economy from falling into a deep recession during the first years of the crisis, but they helped it to bounce back pretty fast. Today Slovakia is growing (at 2.6% in 2012) well above the OECD average (1.4%).

However, we know that Slovakia is still facing important challenges. Public debt has been rising steadily since 2008 and the fiscal room gained in the run-up to euro accession quickly evaporated during the crisis.. Unemployment has also been increasing, and Slovakia’s unemployment rate is now the 5th highest in the OECD. Domestic demand remains weak. In the context of the euro crisis, the recovery outlook remains uncertain as growth relies strongly on external demand and investment.

To overcome the current difficulties and lay the foundations for a better future, Slovakia needs to improve its production and its competitiveness, strengthen its domestic demand and make its economy more inclusive. To achieve these objectives, we recommend three lines of action:

First, strengthening the fiscal framework.

Slovakia should strengthen its medium-term spending framework by introducing and implementing the planned spending ceilings. This should be coupled with boosting the administration’s capacities to monitor and evaluate spending programmes, and ensure follow-up assessments.

To this effect, the recent creation of the Fiscal Responsibility Board (FRB) is an important step in the right direction. During the budget preparation, the FRB will determine whether the short- and long-run sustainability criteria are being met and implement budget adjustments if necessary. It will also evaluate the effects of structural reforms on budget sustainability.

However, its success will depend on its technical capabilities, which will be severely tested, since its mandate is ambitious and moves into uncharted territory. To ensure its effectiveness, the FRB will need to build up its reputation and credibility with the continued support from the government and opposition, based on complete access to government information.

The effective collection of taxes remains another crucial element in improving the fiscal framework. In this respect, efforts to move towards an integrated tax collection system must continue, while the structure of taxation should be reformed by making it less harmful to growth – notably by increasing real estate and environmental taxes. Further work is needed to combat tax evasion, particularly through improving monitoring activities.

But this is not only about taxing better, it is also about spending better. To succeed in fiscal consolidation without hurting growth, the decisions of policy makers are becoming increasingly important when it comes to distributing funds among competing programmes. The efficiency of public institutions in implementing public spending is also crucial. Slovakia needs to do more with less and this will test the efficiency of its public sector.

Our second recommendation is to raise educational outcomes.

Slovakia has significant space to improve its educational outcomes. While the aggregate PISA score has improved since 2006, it is still below OECD average. The OECD has identified a number of policy avenues aimed at raising Slovakia’s educational outcomes and bringing them in line with other OECD countries. Structural measures should be aimed towards increasing the efficiency of the educational system, particularly by consolidating the network of schools and increasing the average classroom size.

Slovakia currently has the lowest relative wages of teachers among OECD countries. Increasing wages, which requires making appropriate room in the budget, and widening the scope for performance-related pay would go a long way towards improving the attractiveness of the profession. PISA results show that the best performing countries tend to invest more in teachers offering them higher salaries and greater professional status.

Moreover, evaluation systems should be improved to identify dysfunctional schools and best practices, while support towards disadvantaged pupils (low-income families and Roma) must increase. Good-quality early childhood education has a positive impact on future educational outcomes, in particular for children from socio-economically disadvantaged backgrounds.

We welcome the planned removal of premiums for eight-year grammar schools by 2013 and further encourage the development of existing incentives for integrating pupils with special needs in standard schools or classes.

Our third line of advice is to increase employment through activation and better targeted support.

The economic and financial crisis raised Slovakia’s unemployment by 4 percentage points since 2008 to 13.9%; while youth unemployment stands at 28.4%. Particular attention should be devoted to tackling inactivity and unemployment among the youth, low skilled and Roma inactivity. Strong activation policies to minimise the increase in structural unemployment are therefore urgently needed.

We recommend that Slovakia increases spending on Active Labour Market Policies (ALMP) as it remains one of the lowest in the OECD. At the same time, targeting of ALMP should be improved and programmes should be made more client-oriented to effectively support those segments of society in greatest need.

Lastly, more resources must be allocated to the Public Employment Service (PES) in order to boost its role in tackling unemployment. Empirical evidence suggests that services provided by PES, such as job search assistance and counselling, have the largest positive impact on labour market outcomes. We recommend the reorganisation of PES services by creating one-stop shops for jobseekers; while the effective online collection of job offers should be established, for instance by encouraging employers to publish vacancies on a dedicated website.

Slovakia needs to make progress on these three policy tracks to tap into its great potential, improve its economic performance and make the most of opportunities.

Capitalising on opportunities

Being at the heart of Europe, Slovakia’s location is a great asset! Slovakia can become an important springboard to the European Union’s markets and also to the East. It has nearly 350 million customers within a radius of 1000 kilometres. New steps to improve Slovakia’s productivity and competitiveness can make it an ideal investment platform. The experience of the automotive sector, where car production is booming, can be replicated in other manufacturing sectors.

There are at least two temporary factors that will increase Slovakia’s opportunities as an investment platform.

First, the perspective of sluggish growth in most advanced economies is forcing companies to look for new business opportunities in other markets, especially in emerging economies with high growth perspectives, stable macroeconomic frameworks and solid banking systems.

And second, the costs of production are rising in China. According to HSBC, China’s average manufacturing wage has multiplied by 5 between 2000 and 2011. This is a phenomenon that my own country, Mexico, with more than 3000 kilometres border and a free trade agreement with the United States, is trying to make the most of, attracting firms that used to export to the US from China. Likewise, Slovakia has duty free access to a huge market, the European Union, most of it within 2000 kilometres; it also has a highly skilled and flexible workforce, with lower wages than most European countries, so it should also be tapping into this trend.

Ladies and Gentlemen:

This crisis has been very costly. It has presented governments with unprecedented challenges, but it has also given us a great opportunity: an opportunity to create better economies. This recovery phase is fertile ground for structural reforms. Many countries are making the most of this moment. Slovakia cannot stay behind.

This is Slovakia’s moment to consolidate all the progress made in past decades. This is the time to improve your fiscal framework to promote inclusive growth. The time to invest in education as a tool for social integration and long term well-being. The time to develop active labour market policies to make the most of your powerful labour force. The OECD is full of valuable experiences in these areas and stands ready to support your efforts.

No one knows the challenges of Slovakia better than the Slovaks. That we know very well. Still, we very much hope that this Survey will help you to put these challenges in perspective, build a strategic agenda for reform and design better policies for better lives.